11/3/10

The biggest issue to confront the next governor and legislature is going to be the state’s dangerous financial situation. Come January, a decision is going to have to be made about whether to close the state’s remaining fiscal shortfall of some 30+ million by robbing federal education dollars meant to fund teacher positions. We can figure that since that is the easiest route to take, despite howls of protest from the teacher unions, it will indeed be how the money gets shuffled. Our legislators to date greatly prefer one-time band-aid fixes to fiscal problems.

Then the issue will be how to close the next budget gap of more than $300 million. Adding a one-percent sales tax to everyday purchase items, as advocated by new Governor Lincoln Chafee, is not going to close the gap, so something further (and painful) will have to be done. Remember, federal stimulus money is running out. (Critics of the federal stimulus program may howl at the alleged waste and ineffectiveness of the effort, but they should be reminded that it has propped up the financially ailing states, like RI, for the past two years.) Absent a further infusion of bailout money from the feds, RI is going to have to either curt spending further or raise taxes.

Speaking of Chafee’s sales tax initiative, raising taxes is absolutely anathema in the current political and economic environment. Chafee’s call for a one-percent sales tax expansion is going to be hard to swallow, and legislators who pass such legislation are not going to be able pin blame entirely on Chafee for it, because they are the ones, after all, who control budget and spending matters. They will own that turkey together, and they, unlike the governor, will be up for reelection in 2012.

It’s easy to call for cutting state spending but much more difficult to achieve it. Much of what can be accomplished has already been achieved by outgoing Governor Carcieri. Further reducing personnel will inevitably result in a deterioration in services – you think time spent at the DMV is bad now? There is a solid case to be made that the state spends too much, and it does, but much of what it spends is not on its current staffing across all state departments, it’s on retirement obligations – pension and healthcare costs, which are enormous and seriously underfunded. Reducing those costs needs to be the bulls-eye target.

Reducing those entitlement obligations, however, is almost as difficult as choosing to raise taxes. Take the pension system, for example. All the gubernatorial candidates pledged to reform it, but things get vague when it comes to just how to do it. The idea of taking benefits away from retirees already enjoying them, or reducing them to vested employees counting on them, is a herculean political task. Our legislature has handled the pension issue to date as if it is radioactive, which, politically for its members, it is.

The pension and healthcare obligations that the state has, coupled with its Medicaid entitlement costs, are the real culprits behind the state’s chronic financial problem. These are the so-called “structural” problems causing the state’s year-to-year deficits. And by the way, this deficit hole just keeps getting larger in the years ahead: $416 million in fiscal 2013, $457 million in 2014, and over $500 million in 2015. How we are going to cut spending in entitlement obligations sufficiently to reduce those deficits one year to the next is anyone’s guess. On the other side of the fiscal coin, raising revenue sans new taxes would take an economy that it booming a la China, and no one is predicting that.

Moody’s Investor Service is watching Rhode Island with noted concern. Unless we can somehow tackle our structural deficits in a meaningful way, we can expect to see our bond rating drop at some point, which will make selling state bonds to finance growth that much more difficult. The next governor and legislature will need to put aside partisanship and stalemate to make sure that doesn’t happen. Every Rhode Islander with a stake in the state and its future should support a new era of cooperation and reform.